Take Advantage of the Child Care Tax Credit
Families can save up to $1,200 each year with this tax deduction for child care expenses
Once families find a qualified, trustworthy nanny, the next step is making sure their finances are in order. As long as the nanny is paid on the books, the vast majority of families will be eligible for the Child or Dependent Care Tax Credit. However, according to the IRS, only about 6.3 million families do each year.
Qualifications for a Child Care Tax Deduction
Families have no income restrictions when it comes to claiming the Child Care Tax Credit. As long as the family meets the following requirements, they are able to take advantage of the tax credit:
- The care must be for a child under the age of 13;
- The family must need child care because both spouses work, are looking for work or are full-time students;
- The family must have qualifying child or dependent care-related expenses.
The only catch with the third requirement is that the child care expenses must be for the well-being and protection of the child. A few examples of qualifying expenses are:
- The nanny's wages.
- Fees paid to a placement agency to match the nanny with the family.
- The family's employer taxes paid on top of the nannys wages.
- Dues for enrolling the child in a day care facility.
- Tuition for a day camp (overnight camps are excluded).
How to Claim the Child Care Tax Credit and What You Can Expect to Save
Families will file IRS Form 2441 with their personal federal income tax return in order to claim the Tax Credit for Child and Dependent Care. The form asks for the family's care-related expenses for the calendar year and then calculates their savings based on a percentage determined by the family's income level. While the credit can be as much as 35%, most families will receive a 20% tax savings.
Families are limited on how much in child care expenses they can claim, based on how many kids they have. The expense limit is $3,000 for one child or $6,000 for two or more children. Because most families will receive a 20% tax credit on their childcare expenses, they can expect to receive a tax break of up to $600 if they have one child and $1,200 if they have two or more children.
A Tax Savings Scenario
A family hires a nanny to watch their two daughters ages 5 and 3 during the weekdays while they're at work. They pay their caregiver $29,000 for the year, withhold the appropriate taxes from their and pay the required employer taxes. The familys cost as a household employer breaks down like this:
|Gross Wages for the Nanny||$29,000|
|Social Security Taxes||$1,798|
|Unemployment Insurance Taxes||$258|
|Total Employer Taxes||$2,476.50|
|Total Cost (before tax breaks):||$31,476.50|
Since both parents work full-time and their children are under 13 years of age, they qualify for the Tax Credit for Child and Dependent Care. Their income level translates to a 20% tax credit which they can take on $6,000 of their child care expenses. This means the family will receive a tax break of $1,200, bringing their employer costs down to $1,276.50 nearly half of what they would have paid without the tax credit!
What the example above should illustrate is that families with qualifying child care expenses should always take advantage of the Child Care Tax Credit. Use Care.com HomePays budgeting calculator to see how much you can save and visit our Tax Breaks page for information on other deductions you can take.
- Learn more about household employment payroll and taxes
- See how a Dependent Care Account can also help save money
- Understand how taxes work for your care budget